Your Cheat Sheet to the Debt Ceiling Debacle

Congress is certainly living up to its pathetic reputation these days. After years of political bickering and last minute budget deals, the suits in Washington, D.C. finally managed to let their incompetence get the best of them.

At the beginning of October, the government went into partial shutdown mode, affecting everything from national parks to numerous agencies and public services. The shutdown has no clear end in sight, but the focus is already starting to shift toward the debt ceiling. As we wait for some kind of an agreement from Capitol Hill, here’s your Cheat Sheet to the next round of fiscal drama facing America.

What is the Debt Ceiling?

The total amount of money that the government is authorized to borrow in order to meet its existing legal obligations. It is set by Congress and applies to debt owed to the public and federal government trust funds like Social Security. The current debt ceiling is set at almost $16.7 trillion.

When Will America Need to Raise the Debt Ceiling?

The world’s largest economy started 2013 by hitting its previous debt ceiling of $16.4 trillion. In the final days of 2012, former Treasury Secretary Tim Geithner sent a letter to Congress warning of the inevitable event, saying the department would take “extraordinary measures” to provide approximately $200 billion in headroom.

Eventually, Congress agreed to suspend the debt ceiling for a brief period of time. The move raised the debt ceiling to nearly $16.7 trillion, but the suspension is over, and current Treasury Secretary Jacob Lew estimates the extraordinary measures will run out no later than October 17.

“We estimate that, at that point, Treasury would have only approximately $30 billion to meet our country’s commitments,” explained Lew in a recent letter to Congress. “This amount would be far short of net expenditures on certain days, which can be as high as $60 billion. If we have insufficient cash on hand, it would be impossible for the United States of America to meet all of its obligations for the first time in our history.”

What Happens if the Debt Ceiling Isn’t Raised in Time?

It’s difficult to know for certain since it has never happened before, but if Congress does not raise the debt ceiling in time, the Treasury would not be allowed to borrow money, which is a major problem for a government that consistently spends like a drunken professional athlete. That could cause financial shockwaves and unintended consequences around the world, and start another global financial crisis that results in even more jobs being lost.

With the Treasury unable to borrow money, it would have to stop, limit, or delay payments on many legal obligations, which could include Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and many other commitments. Overall, it would place even more doubt on the full faith and credit of the U.S. Government. During the last debt ceiling debacle in 2011, the Treasury explained that, “The ensuing financial crisis from a default would have catastrophic economic consequences, potentially including the loss of millions of American jobs. And it would lead to higher borrowing costs, reduced retirement savings, and lower home values for families across the nation.”

Could the Treasury Prioritize Payments?

Considering the United States is the issuer of the world’s reserve currency, that is a depressing question to even ask. In theory, the Treasury could prioritize payments by using existing cash and tax deposits to pay the most important bills, but that process might be too complicated for the Treasury.

The Treasury pays millions of bills every day by using a program that automates payments as they come due. With the need to raise the debt ceiling limit just days away, changing the program at this point appears to be too little too late. It would also be viewed as a failure in the eyes of many. Lew notes, “Any plan to prioritize some payments over others is simply default by another name.” However, no matter what happens, the interest on U.S. Treasuries should be the last obligation to go unpaid.

How Did We Get Here?

While the two political parties appear to disagree about everything, they both find a way to work together to run deficits and raise the debt ceiling. As the chart below from PewResearch shows, the debt ceiling has been making steadily increases for decades, under Democrats and Republicans.

How Many Times Has the Debt Ceiling Been Raised?

It’s a crazy notion that America even has a real debt ceiling. Since 1960, Congress has acted 79 times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 30 times under Democratic presidents.

What is the Most Ridiculous Solution?

During the last debt ceiling debacle, a platinum coin idea gained popularity. Due to a law intended to allow the Treasury Department to produce commemorative coins for collectors, the Treasury could theoretically mint a platinum coin with a face value of $1 trillion. There are rules that hinder its use of bills and currency made from other metals, but platinum coins appear to be fair game in any denomination.

In theory, Lew could order the West Point Mint to produce a one ounce $1 trillion platinum coin and have it sent to the Federal Reserve. Since it is legal tender, the central bank would be obligated to accept it. The coin could then be used to wipe out $1 trillion in debt or even be credited to the Treasury’s checking account at the Fed, allowing Washington to deploy another $1 trillion without issuing more debt.

If this all seems ridiculous, you’re right. The idea that the Treasury could solve the debt ceiling debate with a one coin to rule them all strategy belongs in fantasy land. Even if the platinum coin was used amid Washington gridlock, it would only be another can kick until another miracle coin was needed for the next trillion dollars of spending or debt.

What Should We Really Call the Debt Ceiling?

At this point, the national debt ceiling should really be called the national debt target. Congress seems to have no problem hitting the multi-trillion-dollar figure on a regular basis. Last year, the debt target was raised by $1.2 trillion. Congress has placed “restrictions” on federal debt since the Second Liberty Bond Act of 1917 but has done little to contain the total debt load.